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Sancho Limited makes three types of earrings, Exe, Wye and Zed. A traditional product costing system is used at present; although an activity based costing (ABC) system is being considered. Details of the three products for a typical period are: Hours per unit Materials Production Labour hours Machine Cost per unit Units hours (Rs) Product Ex 0.6 1.7 200 700 Product Wye 1.5 1 120 1,300 Product Zed 1 2.5 250 8,000 Direct labour costs Rs60 per hour and production overheads are absorbed on a machine hour basis. The overhead absorption rate for the period is Rs25 per machine hour. Required: (a) Calculate the cost per unit for each product using traditional methods, absorbing overheads on the basis of machine hours. (3 marks) Total production overheads are Rs950,000 and further analysis shows that the total production overheads can be divided as follows: Costs relating to set-ups Costs relating to machinery Costs relating to materials handling Costs relating to inspection Total production overhead % 30 20 20 30 100 The following total activity volumes are associated with each product line for the period as a whole: Number of Number of Number of set ups movements of inspections materials Product Exe 80 11 150 Product Wye 120 22 180 Product Zed 470 77 570 670 110 900 Required: (b) Calculate the cost per unit for each product using ABC principles (work to two decimal places). (14 marks) (c) Explain why costs per unit calculated under ABC are often very different to costs per unit calculated under more traditional methods. Use the information from Sancho Limited to illustrate. (4 marks) (d) Discuss the implications of a switch to ABC on pricing and profitability. (4 marks)